The Co-Work Generation Takes NYC

For eight months, since the inception of the co-working space Alley NYC in Midtown, Harry Raymond was hard at work on the 17th floor of 500 Seventh Avenue with his team developing Shindig, an iPhone app that helps users identify liquors, wines and cocktails. Mr. Raymond, co-founder and chief executive of the company, is now working out of Hamilton, NY, as part of the Entrepreneurs of NY Fund.

Shindig represents a success story for New York co-working and an achievement of the goal of space providers: for members to outgrow their space.

“We are successful if we help companies outgrow us,” said Jesse Middleton, co-founder of WeWork Labs, during a tour of WeWork’s 175 Varick Street space last month.

Credit: Amanda Cohen

As the New York startup scene, or Silicon Alley as it is known, has exploded over the past five years, so has the availability of co-working spaces. Since 2008, big industry names like New Work City, Grind, General Assembly, Wix, WeWork and Alley NYC have opened about 15 co-working spaces across the city, but a recent report from ABS Real Estate estimates that there are between 40 and 50 co-working spaces in New York.

With this growth comes inevitable challenges. Many of the city’s largest landlords have rejected co-working space providers in hopes of eventually opening their own co-working or boutique office space businesses, and some already have. Further, the question remains just how many more co-working spaces New York can genuinely handle. Indeed, some brokers worry that a critical mass may already be approaching.

“These operations are expanding in the city exponentially,” said Michael Cohen, president of the tristate region at Colliers International. “Everyone is in the market for more space. The question remains, how much can New York City really absorb?”

The number of co-working spaces in New York is linked directly to their profitability as a cash-generating business model, brokers and owners told The Commercial Observer.

“Co-working is a viable option financially, because you can sell one desk multiple times,” Jason Saltzman, founder of Alley NYC, told The Commercial Observer during a tour of its space, which was relatively hushed on a Friday, with a handful of members milling about the common area.

Cost of membership at New York’s co-working spaces varies. Space is available daily for free on a first-come-first-served basis at Wix and costs approximately $600 per month at WeWork. Pricing, though, is rarely an issue, and choice comes down primarily to the type of startup an individual is operating.

“Based on what I’ve seen, the costs are all comparable,” said Ashkán Zandieh, director at ABS Partners. “It’s never a driving force when it comes to co-working. It’s who you want to work with and who you want to sit next to.”

Though Shindig will receive $15,000 as part of the ENY program and is gearing up for a round of seed funding, the startup intends to return to Alley NYC once its six-week stint upstate is finished.

“We feel like we owe it to them to stick around, and why not?” Mr. Raymond said. “It’s such a great community.”

Community is a word you hear a lot in the co-working scene. In fact, it’s what most differentiates co-working from traditional office providers, according to industry analysts.

“The difference between co-working and the Regus and other executive office suites of the world is culture,” Mr. Zandieh said. “Look at WeWork on Varick Street. It is laid out just like office suites, but what they are selling you is culture, a collaborative culture.”

While WeWork Labs, a WeWork affiliate, caters primarily to tech startups and includes a more selective application process and subsidized fees, New Work City is geared more toward freelancers. WeWork’s traditional model, which separates different industries by floor, has also begun to cater to industries by location, with fashion, for example, more naturally drawn to offices in Chelsea and the West Village.

As the co-working model continues to grow in New York, so will availability of space, both in size and location. Alley NYC, less than a year old, is already negotiating to take the rest of the 17th floor of 500 Seventh Avenue, another 10,000 square feet of space. WeWork will soon move its headquarters from 175 Varick Street, where it once occupied just one floor, to 120,000 square feet at 222 Broadway.

Scalability is the key.

“I view [co-working] similarly to startups,” Mr. Zandieh said. “They think about scalability all the time, growth all the time.”

“WeWork started at 175 Varick with one floor, then took two floors. Rather than venturing off into Hudson Square, they scale within their own building,” he added.

Though some of the city’s landlords have been quick to capitalize on the increasing number of co-working spaces in New York, the largest have eschewed welcoming them to their buildings for fear of increasing competition for their own branded spaces.

“A lot of landlords are going into the business for themselves,” said Mr. Cohen. “They’re generally opposed to allowing third-party co-working in their portfolio.”

One example is SL Green, which has started Emerge212, a boutique office space provider with locations at 3 Columbus Circle, 125 Park Avenue and 28 West 44th Street.

Additionally, there are fears among some in the real estate community that the rapidly growing co-working bubble is set for inevitable collapse.

“If there’s a shakeout, who will the winners and losers be?” Mr. Cohen asked. “There’s no good answer; it’s anybody’s guess.”

Traditionally focused in Midtown South, the tech and startup scene in New York is expanding beyond its traditional borders. Both WeWork and Alley NYC have opened or are opening in areas not generally considered hotbeds for the startup community. Grind has also expanded its presence, taking 14,436 square feet at 1412 Broadway in Midtown.

“I have to say that the boundaries as we understood them five years ago have shifted in a very unpredictable way, and the shifting is not done yet,” Mr. Cohen said of the expansion. “Silicon Alley in New York is spilling over into the Financial District and Midtown, and the co-working spaces are looking at a variety of geographies—they’re not as particular.”

WeWork has largely dominated the national co-working market, with 8,000 members across its locations in New York, San Francisco and Los Angeles. Its popularity is so great that at the time of writing, WeWork is 100 percent full, with an extensive wait list.

Unique among the space providers, WeWork has an in-house real estate team that looks nationally for potential spaces and new locations.

“Figuring out where we want to go is our ‘secret sauce,’” said Ben Kessler, director of marketing at WeWork. He added that the company is looking at other cities but would not elaborate on where, though possibilities could include Austin and Las Vegas, which have growing startup and tech communities. “Hopefully international will happen in our lifetime,” he noted.

No matter where individual spaces are located, co-working spaces are consistently a boon for the local economy and submarkets, because once startups outgrow their co-working spaces, they almost always stay in the area they were previously working in.

Both IDoneThis, a progress and productivity software provider, and Material Wrld, a high-end fashion startup, which were born out of WeWork Labs, have moved on to their own office spaces but have remained nearby, according to Mr. Zandieh.

Generally, co-working spaces limit the number of people a company can have in its space to around five or six. Once that number is reached, companies begin looking for office space.

“Is it beneficial for a startup to pay $500 per person at a co-working space when they’re planning on expanding by five additional employees?” asked Mr. Zandieh. “You’re looking at 1,500 square feet. No co-working space is going to accommodate that.”

It is also important for companies to leave the co-working scene to form their own identities, according to Mr. Zandieh. “If you want your own identity, you’re going to have to eventually leave,” he said.

Though the number of startups in New York has grown significantly over the past half-decade, it is too simplistic to assume that companies have stayed in New York rather than bolting to the traditional hotbed of California’s Bay Area.

“It depends on the type of tech you are; everything is location based,” Mr. Zandieh noted. “Particular types of startups are going to come here.”

Those startups that are in New York focus on revenue-driven models, rather than the traditional user-based formulas popular in San Francisco.

“New York business-to-business start-ups focus their efforts on revenue not investment,” Mr. Zanidieh wrote in his Tech Starter report issued earlier this year. “In addition, some start-ups might not need funding or additional funding beyond the seed or Series A stage.”

Startups can even use co-working space as a reliable source of clients and funding. Some venture capital firms even operate small offices out of co-working spaces.

“It’s a way for them to keep ears low to the ground, where they can see what sort of startups are coming out of the spaces,” Mr. Zandieh said.

Before he started Shindig, Mr. Raymond operated a digital strategy consultancy called East Village Digital. In his first year of business, 50 percent of paid clients came directly from people met in co-working communities.

“If that’s not reason enough to stop working at Starbucks, I don’t know what is,” he said.